Key Takeaways:
- You can boost your pension income by up to $3,500 per year by taking advantage of the pension income tax credit and the pension income splitting rules.
- The pension income tax credit allows you to claim a non-refundable tax credit of 15% on up to $2,000 of eligible pension income, which can save you up to $300 in federal taxes.
- The pension income splitting rules allow you to transfer up to 50% of your eligible pension income to your spouse or common-law partner, which can lower your combined tax bill by up to $3,200.
- To qualify for these benefits, you need to receive eligible pension income, such as periodic payments from a registered pension plan, a registered retirement income fund, or an annuity.
- You can also convert your registered retirement savings plan (RRSP) into a registered retirement income fund (RRIF) and start withdrawing a minimum amount as eligible pension income as early as age 65.
If you’re looking for ways to increase your retirement income, you might be interested in learning how to get an extra $3,500 in pension income every year. This is not a scam or a gimmick, but a legitimate way to take advantage of some tax rules that can benefit pensioners in Canada.
In this article, we’ll explain how you can use the pension income tax credit and the pension income splitting rules to boost your pension income and lower your tax bill. We’ll also show you how to qualify for these benefits and what steps you need to take to claim them.
Also Read: OAS Increase in 2024 What You Need to Know About it
What Is the Pension Income Tax Credit?
The pension income tax credit is a non-refundable tax credit that allows you to claim 15% of up to $2,000 of eligible pension income on your tax return. This means that you can reduce your federal tax payable by up to $300 per year. Depending on your province or territory, you may also be eligible for a provincial or territorial pension income tax credit, which can save you even more money.
To claim the pension income tax credit, you need to receive eligible pension income, which includes:
- Periodic payments from a registered pension plan (RPP), such as a company pension or a public service pension.
- Periodic payments from a registered retirement income fund (RRIF), such as a RRIF that you set up with your RRSP funds.
- Annuity payments from a registered retirement savings plan (RRSP), a deferred profit-sharing plan (DPSP), or a pooled registered pension plan (PRPP).
- Annuity payments from a matured registered retirement income fund (RRIF), a matured registered retirement savings plan (RRSP), a matured deferred profit-sharing plan (DPSP), or a matured pooled registered pension plan (PRPP).
Note that the pension income tax credit does not apply to the following types of income:
- Old Age Security (OAS) benefits
- Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) benefits
- Guaranteed Income Supplement (GIS) benefits
- Retirement compensation arrangement (RCA) payments
- Salary or wages
What Is Pension Income Splitting?
Pension income splitting is a tax-saving strategy that allows you to transfer up to 50% of your eligible pension income to your spouse or common-law partner. By doing so, you can lower your combined tax bill by shifting some of your income to your partner, who may be in a lower tax bracket than you.
For example, suppose you receive $40,000 of eligible pension income and your spouse receives $10,000 of other income. If you’re in the 30% tax bracket and your spouse is in the 15% tax bracket, your combined tax bill would be $12,000 without pension income splitting. However, if you transfer 50% of your pension income ($20,000) to your spouse, your combined tax bill would be $8,800, saving you $3,200 in taxes.
To qualify for pension income splitting, you and your spouse or common-law partner must meet the following conditions:
- You must be married or in a common-law relationship at any time in the year or at the date of death.
- You must not be living separate and apart from each other at the end of the year and for a period of 90 days or more due to a breakdown of your relationship.
- You must both file a tax return for the year and elect to split your pension income by completing Form T1032, Joint Election to Split Pension Income.
How to Qualify for the Pension Income Tax Credit and Pension Income Splitting
As you can see, the pension income tax credit and pension income splitting can provide you with significant tax savings and increase your pension income. However, to qualify for these benefits, you need to receive eligible pension income, which may not be the case for everyone.
For instance, if you only have RRSPs and you’re not receiving periodic payments from them, you won’t be able to claim the pension income tax credit or split your pension income with your spouse. Similarly, if you’re receiving CPP or OAS benefits, they won’t qualify as eligible pension income either.
Fortunately, there’s a simple way to overcome this hurdle and create eligible pension income for yourself. All you need to do is convert your RRSP into a RRIF and start withdrawing a minimum amount from it as pension income. You can do this as early as age 65, even if you’re still working or have other sources of income.
By converting your RRSP into a RRIF, you can benefit from the following advantages:
- You can claim the pension income tax credit on up to $2,000 of your RRIF withdrawals, saving you up to $300 in federal taxes.
- You can split up to 50% of your RRIF withdrawals with your spouse, potentially saving you thousands of dollars in taxes.
- You can defer taxes on the remaining balance of your RRIF, which can continue to grow tax-free until you withdraw it.
- You can choose how much and how often you want to withdraw from your RRIF, as long as you meet the minimum withdrawal requirements set by the government.
- You can name your spouse as the beneficiary of your RRIF, which means that your RRIF can be transferred to your spouse tax-free upon your death.
How to Convert Your RRSP into a RRIF
Converting your RRSP into a RRIF is a simple and straightforward process that you can do with the help of your financial institution. Here are the steps you need to follow:
- Contact your RRSP provider and inform them that you want to convert your RRSP into a RRIF. You can do this at any time, but you must do it before the end of the year in which you turn 71.
- Fill out the necessary forms and choose the type of RRIF you want. You can choose between a regular RRIF, a self-directed RRIF, or a locked-in RRIF, depending on your preferences and circumstances.
- Decide how much and how often you want to withdraw from your RRIF. You can choose monthly, quarterly, semi-annual, or annual payments, and you can change the amount and frequency at any time. However, you must withdraw at least the minimum amount required by the government, which is based on your age and the value of your RRIF at the beginning of the year.
- Review your investment options and select the ones that suit your risk tolerance and financial goals. You can invest your RRIF funds in a variety of securities, such as stocks, bonds, mutual funds, ETFs, etc. However, you should be aware of the fees and charges associated with your RRIF investments and withdrawals.
- Confirm your RRIF conversion and start receiving your pension income. You will receive a tax slip at the end of the year, showing the total amount of your RRIF withdrawals and the taxes withheld. You will have to report your RRIF income on your tax return and pay any additional taxes if applicable.
Conclusion
Getting an extra $3,500 in pension income every year is not a pipe dream, but a realistic possibility that you can achieve with some smart planning and tax optimization. By taking advantage of the pension income tax credit and the pension income splitting rules, you can reduce your tax bill and increase your disposable income.
However, to qualify for these benefits, you need to receive eligible pension income, which may not be the case for everyone. If you only have RRSPs or other non-eligible sources of income, you can convert your RRSP into a RRIF and start withdrawing a minimum amount as pension income. This way, you can create eligible pension income for yourself and your spouse, and enjoy the tax savings and income boost that come with it.
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